If you’re a future real estate investor who wants to understand the best way to organize and protect your assets, you should seriously consider forming a Series LLC for your real estate business.
What Is a Series LLC?
A Series LLC is a unique limited liability company that allows you to form a “parent” LLC that functions as an umbrella organization over multiple subsidiary LLCs. These “mini” LLCs, also commonly referred to as “cells,” are all part of the same master LLC, but have limited liability protection from each other. This is an ideal business formation option that would suit the needs of real estate investors who own multiple properties but do not want to set up separate LLCs for each of those investments.
The Series LLC model is only available in certain states. As of 2020, these states include Alabama, Arkansas, Delaware, District of Columbia, Illinois, Indiana, Iowa, Kansas, Missouri, Montana, Nebraska, Nevada, North Dakota, Oklahoma, Puerto Rico, Tennessee, Texas, Utah, Virginia and Wyoming.
Forming a Series LLC can be a simple and cost-effective way to structure your real estate holdings while minimizing the risk they can have on each other. If you are thinking about establishing a Series LLC, here are six reasons why this type of formation would be the right choice for your real estate business.
Series LLCs Help You Organize Your Real Estate Assets
Once you set up a Series LLC, it is much easier to create your subsidiary or cell LLCs that will operate under the parent (or master) company. Each subsidiary or “series” is organized using the original Operating Agreement for the parent LLC. The LLC Operating Agreement for your real estate business needs to describe the intended structure in detail in order to ensure compliance. With this type of company, each subsidiary LLC acts as a business-within-the-business. Each cell LLC will also have its own:
- Bank account
Series LLCs Have Reduced Startup Costs
Real estate investors often choose Series LLCs because this business structure streamlines the organizational process that is required by state and federal agencies. Series LLCs only require one Registered Agent, which can be a nice savings. Overall, a Series LLC, and any additional cell LLCs that operate and are added under the umbrella company, will cost you much less than forming multiple LLCs. (Of course, if you operate in multiple states, you will need to pay additional Registered Agent fees in each state where you do business.)
It Provides More Liability Protection
Many real estate investors might think they don’t need a Series LLC because they can just buy liability insurance to protect themselves from lawsuits. This is a mistake. Getting liability insurance is often a good idea, but you shouldn’t assume that liability insurance will protect you from all the risks and headaches associated with bad tenants or declining investments (especially when you consider the limitations on protection that many insurance policies contain).
For example, let’s assume that you are not structured as a Series LLC and an unhappy tenant decides to sue you claiming there is a mold problem. Now your headache and legal problem just got worse since mold claims aren’t covered under your liability insurance.
By not being structured as a Series LLC, and relying only on liability insurance, not only could you lose out on the assets of the property in question, but your other investments could fall prey to this lawsuit because you didn’t separate them using the umbrella model of a Series LLC.
Reduced Administration and Paperwork
Establishing a Series LLC means less paperwork. You only need to register with the state once, instead of multiple times for each LLC. You only need one Operating Agreement, and you’ll only submit and pay one annual report fee. This can save you a lot of money and time.
Series LLC documents can be just a few pages and can simply state the series name, the managing party and the members for that particular property or series. Governing of the subsidiary LLCs will fall on the original Operating Agreement that was established and filed for the parent company. This will save you the time and effort of making separate filings for each entity and will, as well as all the filling and future renewal costs.
Series LLCs Can Lessen Risk
Real estate investors are often advised to separate their holdings for one very simple reason: doing so can lessen the risk of any one property affecting the others due to a lawsuit, bankruptcy or other unexpected liability issues.
With a Series LLC, each individual real estate LLC under the parent company has the same protections that regular LLCs have. This can be a lifesaver, especially if you take into account the example earlier where the tenant from one of your properties decides to sue you due to mold. If you do not have a Series LLC (i.e., you have all your real estate holdings operating with one bank account as the same company), then any profits or cash used for those other properties could be at risk if that lawsuit goes in your tenant’s favor.
However, keep in mind that a Series LLC is not a magical shield. In order to maintain the protections for each LLC, be sure you understand the rules in your state and follow the guidelines for maintaining your Series LLC status.
Opportunity to Own More Than One Property
By setting up a Series LLC, you will have the ability to build on your portfolio of properties by adding more cells, at any time, with each being treated as separate units from the umbrella LLC. This all falls under the original Operating Agreement created when the parent LLC was first formed. And as a reminder, each series can even have a different manager and different members.
Choosing a Series LLCs for Your Real Estate Businesses
The business organizational structure of a Series LLC will only work if you are establishing this type of entity in a state where it is recognized and plan on owning multiple business properties within that state. If you decide to expand into another state, especially a state that does not recognize Series LLC formations, you will need to begin the LLC formation process within the new state.
The Series LLC is still not available in every U.S. state, and it isn’t going to be the right solution for all real estate investors. However, a Series LLC might be a good option to reduce your risk and improve the efficiency of your business operations.
When deciding which form of LLC is best for your real estate holdings, it’s also a good idea to discuss your options with a lawyer and/or CPA who has experience in real estate investments. With online LLC formation services like the one that Incfile provides, you can set up your parent LLC with ease.
This is not legal advice. This is informational only. Before making any business decision, please work with an attorney and accountant to determine if this is best for you.
Peter Mavrikis is an author and editor with over 25 years of experience in publishing. He has worked as the Editorial Director for Barron’s Educational Series, as well as Kaplan Test Prep, where he ran the test prep, foreign language, and study guide divisions. Peter has also written several books on history, exploration, science, and technology.